For homebuyers in Texas, the hurdles have arisen again. As interest rates rise, many are wondering what they can do to realistically enter the real estate market. Higher interest means higher mortgage payments, which means people begin to see their purchase affordability diminish. What if we said there's a manageable solution to this common problem?

The name of the game is 2-1 buydown. A 2-1 buydown starts with a low-interest rate and rises over the next several years until reaching its permanent rate. The objective is to pay lower rates over the first three years in return for an up-front payment to the lender. To learn more about how 2-1 buydown mortgages work, keep reading, and we'll help you find your answer.

How the 2-1 Buydown Works

To understand the process of a 2-1, we first must understand the concept of a buydown. A buydown is a mortgage-financing technique that lets homebuyers have a lower interest rate, either for the first few years of the loan or its entire length, so that buyers can receive an extra upfront payment. The homebuyer or the home seller can cover the buydown costs, depending on the deal made. Ideally, it's best to get the seller to pay for the buydown. A negotiation deal buyers agents can handle.

In a 2-1 buydown mortgage, it takes place over three years. In the first year, the loan's interest rate gets a 3-point reduction, the second year has a 2-point reduction, and the third year has a 1-point reduction. After that, the permanent interest rate then goes into effect for the rest of the remaining time. As an upside, anytime buyers decide to refinance, from close to the third year, unused money for the following year's buydown can be put towards a principal reduction on a refinance. These percentage points go a long way in the unexpected outcomes of today's market.

For example, say you have $25,000 available for the buydown, and you used $10,000 for the first year. Simple math tells you there's $15,000 left over. If the following year's rates drop to an acceptable point, you can refinance, and you now have $15,000 to put toward your principal reduction. It's an attractive option that can help buyers and sellers alike, even if they may have different financial situations. The lower monthly payments during the first three years allow the buyers to put away some savings that would otherwise have gone towards a higher mortgage payment. Not only that, but homeowners also have better foresight of a typical monthly payment, helping with budgeting plans and better financial certainty. It opens doors previously deemed shut from the complexities of the market.

It's a phenomenal product that effectively solves everybody's objections because it allows buyers to take advantage of their leverage right now. Sellers currently have all-time equity in their homes, so buyers can leverage their position as their sellers still need to move. Now is the time to go out there and get it. If buyers have good credit, a stable source of income, and reliable assets, they’re in a great position to make some negotiations for the betterment of their life. It's one of the most significant opportunities for those buying real estate from now until the end of the first quarter of 2023, and they should keep it from passing them up. Real estate is an investment, meaning smart, analytical decisions are needed to find financial success. But, as many investors can tell you, always take advantage of an opportunity that can help you, especially if it will only last for a short time.

For more insight on the benefits of the 2-1 buydown, you can view this exclusive sit-down with Levi.